Risks for Turkey’s economy despite stable credit rating

• S&P rated Turkey stable
• Just below investment grade
• Calls to reduce inflation

Turkey’s economic outlook has retained its “stable” rating, according to ratings agency S&P Global, despite heightened political and economic uncertainty since March, with more downside risk than upside opportunity.

The agency had raised Ankara’s sovereign debt rating to its present BB-, just below investment grade, in November, the second increase in 2024. It affirmed that last week.

S&P’s assessment came despite negative issues including the arrest of senior opposition figures in March, which it said had, “led to protests, corporate foreign currency demand, exchange rate volatility, and an estimated decline of $24.4 billion in usable foreign currency reserves over the last month”.

While S&P could lower Turkey’s rating if there was an increase in pressure on financial stability or public finances, it also said the country’s economic management team continued to pursue policies aimed at lowering inflation and bolstering stability.  

There had been little expectation that S&P would lower Turkey’s credit rating, but financial markets executive Iris Cibre told AGBI it could have revised its outlook to negative. 

“However, S&P took into account the increasing of interest rates and the central bank taking tight action, though it also noted the erosion of central bank reserves and the continuation of risk,” she said. 

S&P said it could raise Turkey’s rating if there was further progress in improving long-term confidence in the country’s capital markets and the lira, and in bringing inflation closer to single digits. 

Based on that criteria, a further upgrade could be some time off, if the results of a study conducted by the Turkish central bank are anything to go by. 

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According to the findings of the central bank’s latest economic expectations survey issued on April 25, Turkish householders expect year-end inflation to come in at 59 percent. 

The business community’s expectations were somewhat more positive, with inflation projected to close out 2025 at 41 percent.

These figures are well up on the bank’s target of 24 percent, or the 38 percent posted in April, suggesting S&P’s upside criteria were far from being met. 

The agency had already flagged concerns over Turkey’s political instability a month before its latest ratings note, warning on March 24 just days after Istanbul’s mayor was taken into custody, that rising uncertainty could drive up inflation and slow the rate of lowering dollarisation in the economy. 

With high financing costs, expectations of rising food inflation, due to frost damage, and increases in taxes and energy prices, Cibre says Turkey may struggle to meet the target set by S&P for another ratings rise.

“At this point, single-digit inflation is very distant,” she said.